Artificial intelligence (AI) is creating a substantial amount of value for investors right now. It helped catapult Nvidia from a market cap of around $360 billion to more than $3.3 trillion over the past 18 months alone, and it continues to propel shares of Microsoft and Amazon higher, as well as many others.
But jumping onto the AI bandwagon isn't a silver bullet for organizations facing deeper challenges. Snowflake (SNOW 1.85%) is a prime example: Though it's in a fantastic position to build AI products and services, its underlying business continues to struggle with slowing revenue growth and sizable financial losses.
In fact, while Snowflake stock is down 67% from its all-time high, a further 50% drop from its current price isn't out of the question.
NYSE: SNOW
Key Data Points
Snowflake is in a great position to build AI services
Snowflake created its Data Cloud to help organizations break down the data silos that form when they use several different providers of cloud services (such as Amazon Web Services and Microsoft Azure). The Data Cloud allows them to aggregate all their data, and provides them with powerful analytics software to help them extract as much value from it as possible.
Considering Snowflake specializes in data management, it's in the perfect position to deliver AI products and services to its customers. Last year, it launched Cortex AI, which is a platform businesses can use to develop their own AI applications using a combination of their own data, and ready-made large language models.
Plus, Cortex AI offers businesses a number of AI tools developed in-house by Snowflake. Document AI can extract data from unstructured sources like contracts, and Universal Search enables all employees -- even those in non-technical roles -- to discover valuable insights from across their organization's data using natural language queries, with no programming knowledge required.
Snowflake's revenue growth is consistently decelerating
Snowflake generated $789.6 million in product revenue during its fiscal 2025 first quarter (which ended April 30). That was a 34% increase from the prior-year period. However, its growth rate on that metric consistently decelerated since the company came public four years ago:
|
Period |
Product Revenue Growth (YOY) | |
|---|---|---|
|
Q1 Fiscal 2022 |
110% | |
|
Q1 Fiscal 2023 |
84% | |
|
Q1 Fiscal 2024 |
50% | |
|
Q1 Fiscal 2025 |
34% |
Data source: Snowflake. YOY = Year over year.
Snowflake isn't cutting back on growth-generating costs like marketing or research and development, which would help explain this slowdown. In fact, its operating expenses surged 31.6% year over year during fiscal Q1.
A couple of other things are at play. Snowflake's net revenue retention rate was 128% in Q1, so its established customers were, on average, spending 28% more money with it than they had in the prior-year period. In one sense, that's a good sign. However, net revenue retention steadily declined from its peak of 179% at the end of fiscal 2022. That directly feeds into revenue growth.
Second, the rate at which Snowflake is adding new customers is slowing. That's understandable, because it already landed 709 of the Forbes Global 2000 (the largest 2,000 companies in the world). It's unclear how many of the others actually need the services Snowflake offers, which is key because those large organizations could theoretically become some of its highest-spending customers.
The combination of Snowflake's slowing revenue growth and its aggressive spending led to a net loss of $317 million in fiscal Q1, which was a 40.5% larger loss than it booked in the year-ago period. That's a raw deal for investors who are watching the company burn truckloads of cash without concrete results -- at least for now. It's possible Snowflake's growth will reaccelerate in the future on the back of its AI initiatives.
Even after its 67% drop, Snowflake stock remains expensive
Based on Snowflake's $3 billion or so in trailing 12-month revenue and its current market capitalization of just under $42 billion, its stock trades at a price-to-sales (P/S) ratio of about 13.9. That makes Snowflake one of the most expensive cloud software stocks investors can buy -- and that's after the 67% decline it has already sustained.
Here's how Snowflake's P/S ratio compares to some other companies in the cloud software and AI space:
Snowflake basically trades at the same P/S valuation as Microsoft. That isn't exactly reasonable considering that Microsoft operates one of the largest cloud platforms (Azure) in the world and is a recognized leader in AI software already.
Oracle developed a portfolio of cloud-based applications to help businesses across several industries improve efficiency and streamline operations. Oracle has also become a leader in AI data center infrastructure. The company's revenue only grew by 3% in its most recently reported quarter, but that weakness was purely due to a supply issue -- its order backlog (remaining performance obligation) soared by a whopping 44% to a record-high $98 billion, which is a better indicator of demand.
Finally, DigitalOcean is a leading provider of cloud and AI services to small and mid-sized businesses.
Snowflake's P/S ratio is hard to justify when measured against those stocks. It's even less attractive when you consider the company is guiding for product revenue growth to decelerate further to just 24% in its fiscal 2025.
Therefore, investors can't ignore the possibility that Snowflake stock could fall by around half from its current level, which would bring its P/S ratio closer to the ratios of Oracle and DigitalOcean.
